Do you find yourself with too much month left at the end of your money?
Lots of us do. That’s why a budget is so important. It tells you exactly where your money is going. But even if you have a budget, you may have trouble sticking to it. Or you may have trouble keeping your budget categories separate in your mind. If that’s the case, then consider using the envelope system. It’s an easy way to keep your money organized and keep an eye on your spending. It’s been around for years because it works. No matter how old you are or where you are on your financial journey, you can use the envelope system to keep you and your money on track.
Here’s how to use it:
1. Create Your Budget
Yes, you need to budget. Every month. There are lots of budgeting tools out there. For instance, you can use EveryDollar, which you can set up online and sync with an app on your phone. That way your budget is always in your pocket. You can record your cash transactions on the budgeting tool to help you keep track of spending in each category. This will help you adjust your budget in later months!
2. Pay Monthly Bills
These would include items like a mortgage payment, hospital bill, car payment, subscription, and cell phone bill. Typically, these bills are either paid with a check or paid electronically with automatic withdrawal.
3. Get Cash for Monthly Expenses
Go to the bank and withdraw the amount you need for the month. Here’s an example of budget categories you might get cash for:
Household items: $150
Pocket money (hers): $50
Pocket money (hers): $50
Vacation fund: $100
Life insurance: $100
Car insurance: $50
In the example above, you would take out $1,100 for the month. If you get paid twice a month, you’d take out $550 for each pay period. Ask for small bills ($20s, $10s and $5s) because the money will get divided up.
4. Buy Some Ordinary Envelopes
Write down a budget category on each of them. Then, divide up the cash and put the budgeted amount in each envelope. For example, the “Household items” envelope would have $150 and the “Groceries” envelope would have $400.
For savings funds (for things like vacations and car repairs) or non-monthly bills (like car or life insurance), split the cost of the total amount into monthly “payments” and put that cash in its designated envelope. For example, if you pay for your life insurance annually, you would divide the $1,200 premium into 12 monthly payments of $100 and stick $100 in your life insurance envelope every month. Then when it’s time to pay the premium, it doesn’t feel like your bank account took such a big hit.
5. Spend the Cash
When you purchase something, take the money out of the appropriate envelope. On the back of the envelope, write down the date and how much you spent. Once the money is gone, you stop spending from that envelope. No cheating! You can’t borrow money from your household items budget to pay for entertainment!
6. Use the Leftovers
Any money left over at the end of the month goes toward paying off debt, saving for future large purchases (car, dishwasher), or investing for retirement.
The envelope system can change your financial situation. It works. It’ll change your spending habits because you’ll be more aware of the cash leaving each envelope.
Here are some other great reasons to use the envelope system:
1. More Bargaining Power. At least when you’re buying bigger items. Flash some cash when buying a refrigerator and see how much you can save. You have instant leverage.
2. No Identity Theft. When you pay cash, you don’t have to worry about data breaches by cyber-crooks. That one reason is worth using cash!
3. Increased Research Time. When you have to save up for a purchase, like a new stove, you have time to compare brands and prices.
4. Less Spending. Seriously. Several different studies have shown that you’ll spend less money by paying for items with cash. And less spending means you take control of your money and your budget. Win-win.
I know, using cash is so last century. It’s an old-school way of thinking about money. Your grandparents might have used it at one time. But here’s the truth: The envelope system has stayed around so long because it works. Every time. As long as you to stick to it. Paying cash and staying within your budget keeps you on solid financial ground. And that’s a great place to be, no matter how old you are.